Why State Residency Is Important for Tax Purposes

Going out of state for a while might have tax repercussions. Your domicile should be established to help you avoid paying extra for tax purposes.

Are you currently residing in more than one state or are you thinking about moving there? You might desire to move for a work opportunity, to be near your family, to retire in a place with lower taxes, or for other reasons.

Whatever the cause, it’s conceivable to have more than one “home.” But being aware of state residence laws and potential tax repercussions might help you avoid unwanted and expensive consequences from your living arrangements.

To What State Are You Owning Taxes?

Although each state has its tax laws, you will often be regarded as a resident for state income tax purposes. Especially if your “domicile” is there and you live there for more than half the year.

What Exactly Is a “Domicile”?

The term “domicile” for income tax purposes denotes that a resident regards a state as their “real home”. Permanent place of legal residence. Or the location to which they return after being away.

A person is only permitted one residence at a time. You may, however, be regarded as a “statutory resident” of another state and be liable to pay income taxes in both that state and your domicile state. All depending on whether you maintain a house there and how much time you spend there.

183-Day Limit

Your legal status as a resident of a state is significantly influenced by your actual presence there. You become a statutory resident and may be subject to taxation in a state. Especially if you stay there for more than 183 days or more than half a year.

How to Create a Home Base

Establishing your domicile after moving to a new state is crucial to preventing your previous state from suing you for unpaid taxes. States frequently carry out residency audits, thus it would be your responsibility to present proof of a change in domicile.

Records of time spent in each state, preferably with greater time spent in your new domicile state, are examples of evidence that can be used (because of the 183-day rule).

  • Place of employment and status (permanent or temporary).
  • Mail is now being sent from the new domicile state.
  • Driver’s license and vehicle registration transfer to the state of the new residence.
  • Voter registration was updated to reflect the new domicile state.
  • Purchase or rental of a new home in the state of the new domicile. As well as the sale or rental of a home in the previous state.
  • Opening bank and brokerage accounts in the state where the new domicile is located
  • Memberships in clubs or social groups in the state of the new residence.

The purpose of your transfer may be a crucial deciding factor in situations where domicile and resident status may be in dispute. Items on this list may serve as evidence that your move was intended to be permanent rather than temporary.

When Dual Residency May Be Relevant

There are some situations in which you may be regarded as a dual resident and subject to the taxes of both states:

  • If you relocate to another state without establishing residency there.
  • When you own properties in two states.
  • If you were to leave the state you were residing in, transfer to another, and then come back.
  • If you work in one state but reside in another.
  • If you temporarily moved to a different state.
  • If a state considers you to be a resident, you usually have to pay taxes there on all of your income, whether it was earned there or abroad.

You might need to file as a part-year resident in both your new state and your old state when you relocate from one to the other.

You can also be a nonresident of a state and still owe taxes. But a nonresident only has to pay taxes on the percentage of their income that is generated or sourced in that state.

Managing Your State Tax Obligations

Determining your state residence tax-filing status and tax liability can be challenging, as it is with many financial decisions. A tax expert can assist you in analyzing your particular circumstances and guide how to manage and minimize your taxes both now and in the future.